Bottlenecks in the system are causing price instability and that's ‘bad inflation’: Analyst

Anik Sen, PineBridge Investments Global Head of Equities joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: But first, as I said, we saw retail sales coming in stronger than expected-- a break from some of the weaker than expected data prints we've been seeing as of late. Overall, the value for retail purchases for the month of August rising 0.7% after a downwardly revised 1.8% jump in July.

Economists there impressed by what they saw-- we also saw initial jobless claims coming in pretty much around expectations. Expectations were looking for 322,000 jobless claims, we got 332,000. So I'm going to call that one in line. But broadly speaking, a lot of questions maybe about the jitters we're seeing play out in today's session and, perhaps, whether or not we've moved past that twilight zone of weaker economic data being a good thing, because it would mean the Fed would have to stay accommodative for longer.

And for more on that, happy to bring back into the show Anik Sen, PineBridge Investments Global Head of Equities joins us right now. Mr Sen, happy to be chatting with you today. Thanks for taking the time. I mean, I wonder which camp you fall in-- whether or not it's a good thing to see that hotter than expected retail print or whether it means we could get back to things running hot.

ANIK SEN: You know, thanks for having me back, Zack. I think it's always a good thing to see a stronger than expected economic data. You know, obviously, the context here is that the Fed and major central banks around the world have been keeping interest rates low through QE primarily, but also, you know, they went to zero bound and negative interest rates a while ago.

So as you say, we are in that twilight zone where central banks are having to really kind of consider how the message, the pullback on these trillions of dollars of liquidity that they have been pumping in. Our sense, my sense is that they will be patient, because we're not out of the woods yet in terms of the openings, particularly in Asia. You see that supply chains are incredibly disrupted right now.

And you know, they were clearing up until the end of June and July, and then they worsened significantly. So there are tremendous bottlenecks in the system that is causing a lot of price instability. And that is, in my view, bad inflation. This is something that I think particularly the Fed and the ECB are on top of.

And so we need to get through this tremendously difficult period with crosscurrents. So my sense is that the market is starting to worry about the liquidity pullback. It will happen at some point-- has to happen, because the underlying fundamentals of the economy are strong save for this terrible bottleneck situation that we are in right now.

ZACK GUZMAN: Yeah. And I mean, I guess it's kind of-- some of the choppiness might be coming from that too. As Emily highlighted for us in the last hour, kind of digging deeper into the retail sales report, you saw a lot of strength in a lot of what you would expect, right, in terms of back to school payments and things like that. And we're seeing a boost in some of the apparel makers off of those details.

But I mean, I guess that kind of just speaks to the fits and starts we've been seeing. You had travel seeing a nice pop in terms of prices. There was the inflation question around airfares too as people really got back out there-- really reversing once we saw Delta come back. So I mean, it becomes, I suppose, difficult for the Fed to really figure out what's going on if we're seeing kind of haywire readings across different sectors.

ANIK SEN: Yes. And the Fed mainly is concerned about long-term inflation, its inflation expectations. And of course, also they have a very changed framework in terms of employment. They have a much broader dashboard for employment. And they are more concerned about being able to run with an asymmetric target.

So it's an average inflation of 2%, so they're able to run their policy with a higher longer term inflation expectation almost. So that is why I think there is tremendous amount of-- what's the right word-- there's a tremendous amount of patience that the Fed is going to be applying.

And I think this distinction that I make between good and bad inflation-- bad inflation is temporary. It's about bottlenecks, it's about consistency in not being able to bring product to market. And that's where I think what we've already started to see is that the worst appears to be behind us.

The system is getting smarter. Some of the bottlenecks are already clearing if you see some of the price actions recently. So I think it's a little too early to be concerned about the Fed moving aggressively. In fact, I think it's going to be the opposite-- the Fed is going to be tremendously patient.

ZACK GUZMAN: Yeah, and that's, obviously, the picture here in the US. But when you back up and kind of look at the global picture for investors out there, you know, we've been hearing people talking about emerging markets in Asia. If you want to talk about China, though, it's been a tough go-- sector after sector dealing with regulations and crackdowns over there. Lately, it's gaming, before that it was education, and EVs, we could talk about those too. But I mean, when you back up and look at maybe the global picture for investors, what would be the advice there for people who might not be looking outside the US enough?

ANIK SEN: Well, China cares about what they call their three mountains. And that is health care, housing, and education. These are the three big costs that families have to incur. And the latest census data out of China was, I think, shocking for some in the sense that the disparity of income levels, the disparity of living standards I think shows that in this 100th year anniversary of the Chinese Communist Party, that China needs to do something in terms of ironing out some of those disparities. And the three mountains is how they have encapsulated poverty.

So the big difference between Western democracies and China, of course, is that Western democracies have long consultation periods and they tend-- policy does not surprise in the way China very abruptly comes up with policy changes. And I think that's the big difference.

But if you look underneath what China is doing, I would sort of encapsulate the whole thing as a very ESG-centric exercise. It's very anchored on social norms, on social policy. And so when we invest, we are very selective in terms of the companies that really kind of play to that social objective in China. And that is why I think when you invest in emerging markets, you have to really understand the companies, the political situation. And, of course, being on the ground for us is a tremendous benefit.

ZACK GUZMAN: Yeah, important distinction there before investing in markets you might not understand-- and I think a lot of investors have been learning that lesson over the last few weeks here. But Anik Sen, PineBridge Investments Global Head of Equities, appreciate you coming back on. As always, sir, be well.